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Indian Contract Act

Indian Contract Act

Indian Contract Act

The Indian Contract Act of 1872, which is based on the principles of English Common Law, governs the provisions concerning contracts in India (except the state of Jammu and Kashmir). The regulation deals with the framing and validation of contracts or agreements and is the central legislation that regulates and oversees the businesses pursued through such arrangements. This article covers the framework of the Act.


A contract is initiated by making a proposal or offer to another party. The person making such an offer/proposal is the promisor or offeror, and the one who accepts the same is the promisor or acceptor.


Section 2(b) of the Indian Contract Act suggests that a proposal is accepted when the person to whom it is made signifies his/her assent. A proposal so accepted becomes a promise. Acceptance must be in line with the following specifications:

  1. It has been communicated.
  2. It is absolute and unqualified.
  3. It is only communicated to the offeror.
  4. It is issued in the prescribed manner.
  5. It is issued before the specified lapse of time (if any) or within a reasonable time.
  6. It isn’t made before an offer is communicated.
  7. Mere silence doesn’t constitute acceptance.

A proposal can be revoked prior to the communication of its acceptance; a proposal once accepted cannot be revoked.

Revocation of Proposal and Acceptance

A proposal can be revoked prior to the communication of its acceptance; a proposal once accepted cannot be revoked. The revocation may be performed by communicating the notice of revocation to the other party within the time specified for its acceptance or by the lapse of reasonable time. It is also applicable when the acceptor fails to fulfil a condition that is precedent to acceptance and by the death or insanity of the proposer. With respect to the latter, the news of death or insanity must have reached the acceptor before the acceptance.

Lawful Consideration

Consideration refers to an act where an acceptor obliges to the desire of the proposer or promises to do so. An agreement must be supported by a lawful consideration, the essentials of which include the following:

  • It must be processed in accordance with the desire of the promisor.
  • It may be fulfilled by the acceptor or any other person (the Indian law allows the performance of consideration from the acceptor or any other person).
  • It must be an act, abstinence, forbearance or a returned income.
  • It may be in the past, present or future. Past consideration finds its place in the Indian law but is absent in the English law.
  • It must be real, competent and legally valuable.
  • It must be something which the promisor isn’t bound to do.
  • It need not be adequate.

A consideration would be lawful, except under the following circumstances:

  • It is forbidden by law.
  • It is potentially injurious to a person or property of another.
  • The court considers it to be immoral.
  • Its nature would defeat the provisions of law.
  • It is fraudulent in nature.
  • It is opposed to public policy.
  • It involves trafficking in public offices and titles. On this note, it is clarified that agreements for sale or transfer of public offices or procurement of any for public recognition for monetary consideration are not within the permitted legal rights.

No agreements shall form a consideration if it:

  • Restrains legal proceedings.
  • Isn’t conducive to personal liberty.
  • Is a marriage brokerage contract.
  • Deals with marital duties.

Agreements Without Consideration

The following agreements do not require consideration:

  • An agreement that is written and registered between two parties who are closely associated with each other in terms of natural love and affection.
  • The performance of voluntary services, for which the recipient party promises to make payments at a later date (subject to conditions).
  • A time-barred debt.
  • Creation of an agency.
  • Gifts made by a donor.
  • A contract of bailment.
  • Contributions to charity.

Competency to Contract

All agreements are contracts if it has been entered into by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void. Section 11 of the Act makes a person eligible for a contract if:

  • He/she hasn’t attained the age of majority, i.e. 18 years in normal cases and 21 years if a guardian has been appointed by the Court.
  • He/she has a sound mind while making the contract.
  • He/she hasn’t been disqualified from contracting by any other law to which he/she is the subject.

The following are some of the other land laws that disqualify certain people from contracting, which includes:

  • Alien enemy
  • Foreign sovereigns, diplomatic staff, etc.
  • Artificial persons, i.e. corporation, companies, etc.
  • Insolvents
  • Convicts
  • Pardanashin Women

Agent vs Principal Relationship

The principal may engage an agent to act on behalf of him/her in terms of the performance of work, sale of goods, management of the business, etc. The law of agency allows any person to become an agent if he/she is of sound mind.

The authority of an agent may be express or implied. The creation of an agency needs no consideration, and the agency so created is fully empowered to act on behalf of the principal based on orders or his/her own accord (the latter in the event of an emergency). No person can be employed by the agent to perform tasks which are entrusted to him/her, barring a few circumstances where a sub-agent can take on the mantle. An agency may cease to exist by the:

  • Revocation of the principal (subject to conditions).
  • Renouncement of business by the agent.
  • Completion of business.
  • Insolvency or death of the agent.
  • Insolvency or death of the principal.

Express authority is said to be given by written or spoken words, while an implied authority is inferred from the circumstances of the case.

The Obligation of Parties to Contracts

The parties to a contract are obligated to either perform or offer to perform their respective promises, except if such performance is dispensed with or excused under these provisions. It is noteworthy that the promises bind the representatives of the promisor, except if the contract includes specifications on the contrary. If a party to a contract fails to perform the promise, the promisor may put an end to such a contract.

Clause for Legality

If a contract so formulated includes both legal and illegal performances, the legal set of promises is a contract, whereas the other part of the agreement is void.

Contracts with People who are Incapable of Contracting

If a person who is incapable of getting into a contract is being supplied the necessities that suit the condition of his/her life, the concerned supplier is entitled to be reimbursed from the property of such incapable person.

Payment by Mistake

Any person who receives money or thing by mistake or under coercion is bound to repay or return the same.

The doctrine of Privity of Contract

The Indian Contract Act facilitates the provision of a stranger to a consideration, which isn’t the case with a contract. The doctrine of privity of contract is a common law which suggests that a contract cannot confer rights or impose obligations on anyone who isn’t a party to the contract. However, certain agreements are exempted under this rule.

Compensation for Loss or Damage due to Breach of Contract

In the event of a breach in contract, the party which incurs the consequences of such breach is entitled to receive the compensation for such damages by the party who made such breach. Such compensation shall not be issued for any remote and indirect loss or damage sustained for reasons of the breach.